Top Tip – Rental Income and Tax – CII R03, R06, AF1, AF5

I read over the weekend that HMRC is keen to ensure that all the landlords in the UK are paying the correct amount of income tax and how important it is therefore to ensure you are declaring any income from rental properties and keeping accurate and up-to-date records not just of the rents but of expenditure too.

It got me thinking about the numbers of people that rent out rooms in their own homes or take in foreign students over the summer months. Are they all declaring the income to HMRC and do they all know about the Rent a Room exemption and how income over that amount is treated?

Once rent/income exceeds the rent a room exemption of £4,250 the scheme provides two ways to calculate what the taxable profits are and landlords need to ensure that the method chosen is applied correctly.

Method A applies automatically unless an election is made to apply Method B.

Method A:

Profits are worked out in the same way as for any business from property. You take the total gross rent and you deduct any allowable expenses. What is left is taxed at your marginal rate of income tax.

Method B:

Profits are worked out by taking the gross rent and deducting the rent a room exemption limit – £4,250. No other expenses can be claimed with Method B and once this method is chosen it will continue to apply unless the landlord lets HMRC know that they would like Method A to apply.

Example:

Fran lets out a room in her home to foreign students throughout the year and the gross rent for last year was £6,000 with expenses of £1,000 leaving her with a profit of £5,000.

With Method A she will pay her marginal rate of income tax on £6,000 – £1,000 = £5,000.

With Method B she will pay her marginal rate of income tax on £6,000 – £4,250 = £1,750.

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